Why such a pathetic recovery?

The “Age of Obama,” as John noted yesterday, is marked by record poverty, declining incomes, unprecedented numbers depending on federal poverty programs, and millions leaving the labor force in despair.

To be sure, Obama inherited a deep recession. But economists John Taylor and Lee Ohanian (both of the Hoover Institution) remind us that “nearly all recoveries following severe U.S. recessions have featured robust economic recoveries that rapidly restored real income, output, and employment to their pre-recession trends.”

This recovery has featured none of the above. The numbers cited by John and those set forth by Taylor and Ohanian show this to be one of the weakest recoveries on record.

Nor will it do to attribute the pathetic recovery to the fact that the 2007-09 recession resulted from a financial crisis. Taylor and Ohanian tell us that research by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland show that U.S. recoveries following financial crises are typically faster, not slower, than average.

So what has been the problem? According to Taylor and Ohanian, the problem resides in “poorly designed and implemented government policies [that] have impeded capital and technological investments and hiring.”

Since the fall of 2008, the U.S. government has adopted dozens of policies that were advertised as being necessary to restore prosperity. These policies impacted many key economic channels, including monetary and fiscal policies, commercial and investment banking, manufacturing, housing, and the environment. But many of these policies have depressed growth by distorting the normal forces of supply and demand that are critical for a market economy to function well and create new jobs.

Many of the policies that were implemented were based on old Keynesian models that advocate temporary spending increases and one-time tax rebates, while others created new regulations of economic activity in key sectors. But both of these policy responses misdiagnosed the problems facing the American economy. The spending policies had little impact on the economy other than to increase government debt, and regulatory policies raised business costs and depressed growth.

The crown jewel of Obama’s economic policies was a stimulus package of nearly $1 trillion. It failed to spark a healthy recovery for two reasons:

One is that attempts to stimulate spending likely had a much smaller impact than was advertised.

The second is that the type of spending that was supposed to be undertaken – including investment in government infrastructure – simply did not materialize in any significant way. State and local governments did not use these federal funds to significantly expand infrastructure spending. Instead, these governments increased transfer payments and reduced debt, and the nation’s employment rate continued to decline.

What about programs designed to help specific sectors, such as the automobile industry (“cars for clunkers”) and housing?

These policies did little to strengthen either industry. Sales of autos and homes temporarily increased while these policies were in place, but then sales declined sharply once the policies ended. These policies were pure subsidies to some auto and home buyers, with little if any impact on the industries that were supposed to be helped.

Working against recovery is uncertainty over our economic policy:

Specifically, there has been considerably uncertainty about tax rates, with key tax provisions expiring each of the last several years and with little clarity on how tax rates would change over the long haul. Between 2009 and 2011, roughly 250 tax provisions expired, about 10 times the number of provisions that expired in 1999.

These expiring provisions make the tax system highly unpredictable, which in turn depresses the incentive for business to make long-term investments in capacity and technology, and holds business back from significantly expanding their workforce.

What is the answer to the current stagnation? Taylor and Ohanian conclude:

Getting the U.S. economy back on track requires restoring transparency and simplicity to the tax code, including reducing the U.S. corporate income tax rate, and reducing marginal income tax rates, which now exceed 50 percent in some states. In addition, growth will be enhanced by labor, energy, and environmental policy changes that make it less costly to hire workers and reduce the cost of becoming energy independent.

When these changes are made, the U.S. economy will recover strongly. But without these changes, the U.S. economy will continue to significantly underperform, just as it has for the last four years.